November, 2014

In the next part of our series ‘52 Ways to Save Tax’ we look at a way that you can reduce the amount of tax you pay on your self-employed earnings.

Keep reading to find out how changing your ‘payments on account’ can help you to pay less.

52 Ways to Save Tax – Part 7: Change your Payments on Account

If you’re self employed than you pay the tax that you owe based on your previous year’s earnings. This means that you pay any tax owing from the previous tax year plus what is called a ‘payment on account’.

Payments on account are designed to help self-employed people to spread the cost of their tax bill over the year in. They are advance payments towards the tax that you owe for the tax year that you are in and form two instalments. If your tax bill is more than £1,000 you’ll always make a ‘payment on account’ for the current tax year unless you have already paid more than 80 per cent of the tax that is due.

Each payment is half your previous year’s tax bill. Your tax calculation shows you the tax that is due for the previous tax year and the payment on account that you have to make for the current tax year.

For example, your tax bill for the tax year 2013/14 might be £2,000. For the 2014/15 tax year you make your first payment on account of £1,000 by 31 January 2015. Your second payment of £1,000 is due by 31 July 2015.

If you still have tax to pay after you have made your payments on account then you will have to make a ‘balancing payment’. This payment is due by midnight on the 31 January after the end of the tax year.

Your first tax return

Making a payment on account can really catch you out if you are newly self-employed. That is because in your first year you will not only have to pay the tax that you owe but also an additional 50 per cent of this amount ‘on account’ for the next year.

Reduce your payments on account

Your payments on account are based on your previous year’s earnings and profits. If you know that your tax bill this year is going to be lower than the previous year, you can ask HM Revenue and Customs to reduce your payments on account.

To do this you can either:

log in to your HMRC account online

send form SA303 to your local tax office

By doing this you can reduce your payments on account to more accurately reflect your current level of earnings. This will help you reduce the amount of tax that you pay.

However, if you reduce your payment on account if you are having trouble paying your bill you could still find yourself with the same amount to pay at a later date. Indeed, HMRC can charge you interest and penalties if the amount of tax that you pay is too little – and so you could end up paying more tax in the long run.